The Nitty-Gritty Details of Paul Ryan’s Medicare Plan – CORRECTION

(An earlier version of this post said that Paul Ryan’s plan for post-2022 Medicare spending would be indexed to GDP. In fact, it would be indexed to inflation. The earlier post also implied that Ryan’s plan would spend about $400 less on Medicare over the next ten years due to his premiums support/voucher plan for the program. This is incorrect. Ryan’s new deign for Medicare would not begin until 2022.)

First, Ryan is very focused on reducing the size of the federal government; his plan would spend some $6 trillion less over the next 10 years than President Obama’s budget proposal. Second, the introduction of the plan means Ryan’s brand of long-term deficit reduction is now at the front of the Republican agenda — expect this to be a major topic of discussion during the 2012 presidential campaign. Third, costs for Medicare and Medicaid are increasing at rates that will eventually bankrupt the country. Democrats in Congress — and Obama in the White House — have not taken any steps to accept this reality and change it fundamentally. Ryan has.

His plan for Medicare, the insurance program for seniors that’s on an unsustainable path and accounts for about 13% of the federal budget, is extreme by any measure. His proposal would turn the program from a guaranteed benefit into a system in which private insurers would cover elderly Americans, whose premiums would be subsidized by the federal government. And he proposes cutting $700 billion–$800 billion from Medicaid by turning it into a state block grant program. Under Ryan’s budget, according to the Congressional Budget Office (CBO), government spending on mandatory health programs would be reduced from 14% of GDP (under the current trajectory) to 5% by 2050.

But while Ryan has taken a bold step and brought some hard truths into focus, many of the details of his proposal remain fuzzy. Despite its massive cuts to Medicare and redefinition of the program, Ryan’s plan — called the “Path to Prosperity” — devotes just 3½ pages to the changes. I’ve managed to get a few more key details, which answer some glaring questions, but also raise a lot more. Here’s what we now know about how Paul Ryan wants to reshape Medicare and what I’m still dying to find out:

It Makes Medicare Voluntary

Ryan’s plan for subsidizing a private Medicare system actually uses the design for nonseniors found in the Patient Protection and Affordable Care Act, the health reform law passed by Democrats last year. Seniors would shop in a highly regulated exchange, or marketplace, and select among plans already vetted by the federal government. Each plan sold in the exchange would be required to cover a set of standardized benefits.

The subsidies seniors receive would be based on the value of Medicare at the start of the plan. The subsidies would increase at a rate indexed to inflation, which is growing much more slowly than health care costs. The upshot? Medicare beneficiaries would spend far more out of pocket under this system than in the current one. In its analysis of Ryan’s budget, the CBO makes this point repeatedly.

Under the proposal, most elderly people would pay more for their health care than they would pay under the current Medicare system.

Under the proposal analyzed here, debt would eventually shrink relative to the size of the economy—but the gradually increasing number of Medicare beneficiaries participating in the new premium support program would bear a much larger share of their health care costs than they would under the current program

According to the CBO, a typical 65-year-old with a private health-insurance plan covering standard Medicare benefits could be liable for 61% of his or her total health care costs in 2022 under Ryan’s plan. By 2030, the figure could be 68%. Ryan’s plan would vary subsidies to seniors based on income and health status — poorer and sicker beneficiaries would get larger subsidies. But the details of this are still unknown. Who determines the health risk, and how is that translated into dollars?

Ryan says the top 8% of earners would receive less Medicare subsidy support and that those qualifying for Medicaid or earning less than 150% of poverty would get extra federal dollars available in a medical savings account. Still, the CBO says:

… costs to individuals (beyond those covered by the premium support payment) would be higher under the proposal than under traditional Medicare, and some individuals would therefore choose not to purchase insurance … the number of older Americans without health insurance would be higher.

So how does Ryan’s plan prevent seniors from forgoing insurance? It doesn’t. Participating in Medicare would be voluntary. Since we don’t know specifically how subsidy levels would be set, we don’t know how many seniors would be able to afford private insurance or how many would simply choose not to buy it. Will there be a death spiral with the healthiest, younger seniors staying out of Medicare and causing premiums within it to skyrocket? What are the consequences for federal outlays if 75- and even 90-year-olds remain uninsured? They will, as the uninsured now do, still get care. It just won’t be paid for right away by the federal government. But it may well be at some later point, either via Medicaid or hospital charity care reimbursed by the federal government.

It Repeals Obamacare, Sort of

According to Ryan’s plan, repealing the Affordable Care Act would save $1.4 trillion by 2022, yet the plan doesn’t really call for repealing the law. Rather, Ryan wants to repeal the provisions in the law that cost money, meaning those that expand health insurance coverage to 32 million more Americans. Under Ryan’s plan, the subsidies to help low- and middle-income earners buy private insurance would be eliminated, which he says would save $725 billion over 10 years. Nixing the law’s additional Medicaid expenditures, including the expansion of Medicaid to all adults earning up to 133% of the federal poverty line, he says, would save $648 billion.

But the revenue raisers in the law? Ryan would explicitly keep the law’s cuts to Medicare funding, reinvesting the savings back into the program. No word on whether Ryan would eliminate or maintain the other revenue-generating provisions of the law. Under Ryan’s plan, what would happen to the so-called Cadillac tax on high-value insurance plans? How about the fees levied on the insurance industry, pharmaceutical companies and devicemakers? And what about closing the Medicare doughnut hole? The health care law closes the prescription-coverage gap at a substantial cost. Would Ryan reopen the hole? He doesn’t say.

It Raises the Medicare Retirement Age

Ryan would repeal the health care law’s insurance exchanges and individual mandate, which raises another round of questions. Would he leave in place the provisions that require insurers to cover pre-existing conditions? How about the regulations, set to go into effect in 2014, that say insurers must sell coverage to everyone (guaranteed issue) and end the practice of setting prices on the basis of risk or health status (community rating)? Again, he doesn’t say.

If Ryan’s plan is adopted as is — and it won’t be — absent an individual mandate but with guaranteed issue and community rating, private insurance prices in the individual and small-group market would go through the roof. This would lead to more uninsured Americans.

Even more vexing, however, is how 65- and 66-year-olds would get coverage. Although Ryan doesn’t say so in the Path to Prosperity document, which was released on Tuesday, his plan would raise the Medicare eligibility age from 65 to 67 by 2033. This would save the federal government money, but if these people shop for coverage on the open market, one of two things will happen: insurers will either price them out, or drive up prices for everyone. Again, this depends on what Ryan would propose to do with the health care law’s new insurance regulations.

It might not seem fair to expect Ryan’s budget proposal to deal with all the complexities of the U.S. health care system. He’s pitching a deficit-reduction plan, not social policy per say. But that’s the thing about health care. If you change one fundamental element of it, you have to make adjustments all over the place. Ryan’s budget does not appear to do this — at least, not yet — and until it does, it will be hard to take him as seriously as everyone might want to.